Proposed Changes to Small Business Insolvency

15 OCT 2020

 

Due to commence on 1 January 2021, the Federal Government plans to implement a landmark reform to small business insolvency that will change the way small businesses handle liquidations.

The changes to small business insolvency are due to commence when the current COVID-19 insolvency relief ends on 31 December 2020.

What is changing?

Small businesses will be able to access the Government’s new restructure plan instead of being forced into traditional liquidation methods.

Traditionally, a business would be placed under the control of external liquidators to resolve the debt and pay out creditors.

Now, a business who is experiencing financial hardship and faces liquidation under the proposed changes will be able to continue to trade under the direction of its owners whilst a debt restructuring plan is developed.

Eligibility

Small businesses will be eligible to opt into the new insolvency program on the following criteria:

  • The business must be incorporated (the program is not available for sole traders);
  • The business has less than $1 million in liabilities; and
  • All employee entitlements (wages, superannuation, leave entitlements, etc.) have been paid.

Small Business Insolvency Process

Businesses will now work directly with a Small Business Restructuring Practitioner to help the business:

  • determine the company’s eligibility.
  • support the company during the process.
  • develop and review the company’s financial affairs.
  • certify the restructuring plan to creditors.
  • manage the disbursements to creditors under the restructuring plan.

The process aims to have businesses in a restructured debt plan within 2 months, instead of the lengthy insolvency process that can take years.

Why has the change come about?

In the wake of the COVID-19 pandemic, thousands of Australian businesses were placed under additional hardship. This in turn meant employees were forced out of jobs or into reduced hours, grinding the economy to a halt.

The proposed insolvency reforms endeavour to:

  • Keep businesses alive and trading;
  • Keep Australians employed;
  • Better serve the interest of creditors; and
  • Streamline the current complex insolvency process for small businesses.

Developing a simpler, more cost efficient and more accessible program for small businesses during insolvency looks to benefit all interested parties and find a mutually beneficial solution.

What does this mean for you?

It is important to know what options are available to the business during financial hardship and how you can work to resolve those issues. If you run a business and are experiencing a financial squeeze or need advice regarding your situation, please contact Aaran Johnson on ajohnson@marsdens.net.au or Bharath Balasubramanian on bbalasubramanian@marsdens.net.au or by phoning 02 4626 5077 for a discussion about how Marsdens can help you.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

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